Echoes of the 1980s: Inflation, wars, and slowing growth resurface globally

“Brezhnev took Afghanistan, Begin took Beirut and Galtieri took the Union Jack”. Circa 1983, Roger Waters offered some incisive commentary on the geopolitical fun and games of the ’80s. The Soviet Union was into the fourth year of the occupation of Afghanistan. Israel had waltzed into Lebanon, and enabled two bloody massacres in Palestinian refugee camps. Argentina under General Galtieri had occupied The Falkland Islands and the UK had recaptured the Falklands.

 

Iran, led by Ayatollah Khomeini, and Iraq, led by Saddam Hussein, were doing their best to wipe each other’s nations off the map. The US was trying to covertly destabilise Nicaragua and would invade Panama a few years later.

 

India and Pakistan had a short, vicious scuffle on the Saltoro Glacier. There was also the debacle of the IPKF expedition to Sir Lanka, and the successful counter-coup in the Maldives that restored an India-friendly government. India and China also had a face-off up in the mountains during the 1980s.

 

The decade was also marked by the so-called “Star Wars”. This was an American effort to bankrupt the USSR by pretending to develop space-based weapons. The weapons were science-fictional in concept and about as fantastical as the swag displayed onscreen in the eponymous movie franchise. The plan worked. The USSR did go bankrupt under the stress of fighting an unwinnable war in Afghanistan, and investing vast sums into research & development of futuristic weapons. There was also double-digit inflation in the US and much of the Western world, and there was the Black Monday crash of October 1987, when the Dow Jones fell over 20 per cent in a single session.

 

Four decades later, the world might be headed for another period of similar fun and games. The new US President in his inaugural speech said he wanted to end ongoing conflicts and be remembered for the “wars we never get into”. But he also said he wants to take over Greenland and the Panama Canal, and Canada, and he won’t rule out the use of force to further these ambitions. Go figure.

 

Russia is now into the 11th year of trying to annex Ukrainian territory by force. Israel has attacked Gaza, the West Bank, and bombed Syria, Lebanon and Iran. China has repeatedly reiterated its territorial claims on Taiwan, large parts of the South China Sea, Arunachal Pradesh, Ladakh, and chunks of Bhutan. 

 

Territorial ambitions are a zero-sum game. As Mark Twain once pointed out in the context of buying real estate, “They’re not making land anymore”.  When one nation wants to extend its boundaries, another nation usually objects on the grounds that its territory would shrink correspondingly. This can, and often does, result in violent conflict. Unlike in the 1980s, there are at least nine nations with nuclear weapons in the game circa 2025, which increases the threat if conflict escalates.

 

Another thing that usually results from conflict, or the threat of conflict is inflation. Supply chains break down. Essential commodities are diverted to the military effort. Energy prices spike. If people are conscripted in large numbers, there’s a shortage of labour to do normal things like farm, work on assembly lines, drive buses, or fry pakodas. During World War I, this shortage led to the emancipation of women, who had to willy-nilly do these jobs and leveraged their foothold in the workforce into gaining the vote. During World War II, it led to full employment in the US that ended the lingering effects of the Great Depression.  But another round of extended inflation could have horrific effects in 2025, following a pandemic that triggered supply chain disruptions and inflation.

 

The US also seems to be looking to push China into a techno-economic battle by cutting off the supply of high-end chips, and imposing tariffs on Chinese imports. Unlike in the 1980s, this isn’t necessarily a battle the US will win. China is an economic powerhouse. Moreover, tariffs will hurt US consumers and industry, who will actually pay the enhanced costs.

 

However, the global economy is collateral damage. Growth has slowed everywhere at the mere threat of more conflict, and inflation has spiked along with currency volatility. Investors have to reboot strategies and rework asset allocations. A flight to safety may be an instinctive reaction, but it’s probably wrong. Debt loses value during inflationary periods; equity gains if investors can ride out the storm.